Top 10 Social Security Questions Asked by Baby Boomers... And How To Answer Them

Transcription

1 Top 10 Social Security Questions Asked by Baby Boomers... And How To Answer Them By Elaine Floyd, CFP Director of Retirement and Life Planning, Horsesmouth, LLC 1

2 Elaine Floyd, CFP Director of Retirement and Life Planning Horsesmouth, LLC 2

3 Question #1 I applied for early benefits and now regret the decision. Is there anything I can do? 3

4 The unintended consequences of early claiming Lower lifetime benefits Earnings test Limited spousal strategies 4

5 How to rectify the mistake of early claiming Withdraw and repay (within 12 months) If you change your mind: Go back to work Suspend at FRA 5

6 Question #2 Can I file and suspend and collect a spousal benefit? 6

7 Answer: No To receive a spousal benefit while your own benefit builds delayed credits, you must file a restricted application for your spousal benefit. You must NOT file for your own benefit 7

8 Question #3 Can I claim my spousal benefit at 62 and switch to my own benefit at 70? 8

9 Answer: No Deemed filing rule: If you file before FRA, you must file for all the benefits you are entitled to (except survivor) This means you will be paid your own reduced benefit first To receive a spousal benefit while your own benefit builds delayed credits, you must file a restricted application for the spousal benefit at FRA or later 9

10 Question #4 Can I claim my own small benefit at 62 and jump up to 50% of my spouse s benefit at FRA? 10

11 Answer: No If you claim your own benefit at 62 and your spousal benefit at FRA, you will receive a combination benefit comprising your own reduced benefit and a spousal add-on Example: Jill s PIA is $800. Jack s PIA is $2,600 Jill files at 62 and receives 75% of $800 = $600 At FRA Jill files for her spousal benefit. She will receive the difference between her PIA and onehalf of Jack s PIA: $1,300 - $800 = $500 Her combination benefit: $600 + $500 = $1,100 11

12 Question #5 What happens if I keep working? 12

13 Benefits based on highest 35 years of earnings up to taxable maximum Table of maximum earnings Year Maximum Maximum Maximum Year Year earnings $ earnings $ earnings $ , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , ,500 13

14 Year Age Nominal earnings Indexing factor Indexed earnings Average Indexed Monthly Earnings (AIME) for baby boomer born in 1953 Maximum earnings since 1975 $3,807,775 in total indexed earnings 420 months = $9,066 AIME , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , ,000 14

15 Primary Insurance Amount (PIA) Baby Boomer born in 1953 Maximum Social Security earnings every year since age 22 AIME = $9,066 PIA formula: $826 x.90 = $ $4,154 x.32 = $1, ($4,980 - $826 = $4,154) $4,086 x.15 = $ ($9,066 - $4,980 = $4,086) Total = $2, PIA = $2, Amount worker will receive at full retirement age 15

16 Answer: Your earnings record will continue to be updated Impact on benefit will vary If you already have 35 years of high earnings the impact will be minimal If you replace zero or low earnings years with higher earnings, your benefit will increase If you work part time or at a low salary, there will be no effect 16

17 Effect of working longer if more than 35 years of earnings Maximum earner born in 1953 age 62 in 2015 If he works until age: Years of earnings used in benefit computation Age-70 benefit $4, $4, $4,488 17

18 Question #6 I m divorced. Can I collect Social Security off my ex-spouse s record while my own benefit builds delayed credits? 18

19 Rules for divorced-spouse benefits Marriage must have lasted at least 10 years Claimant must be currently unmarried Ex-spouse must be at least 62 If divorce occurred over 2 years ago, ex-spouse does not need to have filed for own benefit Benefit = 50% of ex-spouse s PIA if claimant files at FRA Both ex-spouses can claim divorced-spouse benefits on each other! 19

20 Optimal strategy for divorced client: Claim divorced-spouse benefit at FRA and switch to own maximum benefit at 70 20

21 Question #7 My husband has died. Can I take a survivor benefit now and switch to my own benefit later? 21

22 Optimal strategy for high-earning widows: Take reduced survivor benefit at 60 and switch to maximum retirement benefit at 70 22

23 Question #8 I am 66. My wife is 45. We have two young children. Can my wife and kids get Social Security benefits? 23

24 Rules for dependent benefits Worker must have filed (can suspend if over FRA) Children can receive benefits to age 18 Spouse can receive child-in-care benefits until youngest child turns 16 Each benefit = 50% of worker s PIA All benefits are limited by the maximum family benefit $4,200 MFB -2,400 subtract worker s PIA $1,800 amount available to family members (evenly divided) 24

25 Question #9 I don t qualify for Social Security because in my teaching job I paid into an alternate retirement system. Can I get spousal benefits? 25

26 Government Pension Offset (GPO) reduces spousal and survivor benefits by two-thirds of the non-covered pension Example Teacher receives a pension of $3,000/month Spousal benefit = $1,200 (50% of $2,400) Two-thirds of pension is $2,000 $1,200 - $2,000 = negative number Therefore no spousal benefits 26

27 Question #10 How can I maximize my Social Security benefit? 27

28 Strategy #1 for maximizing Social Security benefits Work longer, earn more 28

29 Strategy #2 for maximizing Social Security benefits Apply at the optimal time 29

30 Full retirement age Year of birth Full Retirement Age (FRA) & 2 mos & 4 mos & 6 mos & 8 mos & 10 mos & 2 mos & 4 mos & 6 mos & 8 mos & 10 mos & later 67 30

31 Effect of early or delayed claiming Age % of PIA if FRA = 66 Benefit in today's dollars if PIA is $2,685 Benefit adjusted for annual COLAs* ,014 2, ,148 2, ,327 2, ,506 2, ,685 2, ,900 3, ,115 3, ,329 4, ,544 4,386 *Assumes age 62 now; 2.7% annual COLAs 31

32 Effect of early or delayed claiming Age % of PIA if FRA = 67 Benefit in today's dollars if PIA is $2,685 Benefit adjusted for annual COLAs* $1,880 $2, ,014 2, ,148 2, ,327 3, ,506 3, ,685 3, ,900 4, ,115 4, ,329 5,099 *Assumes age 54 now; 2.7% annual COLAs 32

33 Simple breakeven analysis 33

34 Strategy #3 for maximizing Social Security benefits Coordinate spousal benefits 34

35 Spousal Strategies File and suspend One spouse files for own benefit at FRA to entitle other spouse to spousal benefit First spouse suspends benefit to earn DRCs to age 70 Important: Must be FRA to suspend Claim now, claim more later One spouse files a restricted application for spousal benefit at 66 (other spouse must have filed for own benefit) Switches to his own benefit at 70 Important: Must be FRA to file restricted application How to decide: Customized scenario planning for each couple based on individual ages and benefit amounts 35

36 Example of scenario planning Andy & Alice Both age 62 Andy s PIA = $2,600 Alice s PIA = $1,200 Which strategy will give them the most in lifetime benefits? 36

37 Scenarios for Andy & Alice Scenario 1 Andy and Alice both file now, at age 62 Scenario 2 Alice files for her own benefit now, at 62 Andy files for his benefit at age 70 Scenario 3 Alice files and suspends at 66 Andy files a restricted application for his spousal benefit Both switch to their maximum benefit at age 70 Scenario 4 Andy files and suspends at 66 Alice files a restricted application for her spousal benefit Both switch to their maximum benefit at age 70 37

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39 Strategy #4 for maximizing Social Security benefits Maximize survivor income 39

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41 Strategy #5 for maximizing Social Security benefits Minimize taxes on benefits 41

42 Taxation of Social Security benefits Filing status Provisional income* Amount of SS subject to tax Married filing jointly Under $32,000 $32,000 - $44,000 Over $44,000 0 Up to 50% Up to 85% Single, head of household, qualifying widow(er), married filing separately & living apart from spouse Under $25,000 $25,000 - $34,000 Over $34,000 0 Up to 50% Up to 85% Married filing separately and living with spouse Over 0 Up to 85% *Provisional income = AGI + one-half of SS benefit + tax-exempt interest 42

43 Tax planning strategies Start drawing down IRAs before age 70-1/2 to reduce RMDs Convert traditional IRAs to Roth Delay Social Security: reduces number of years benefits are subject to tax Reduce expenses: pay down debt, adopt simpler lifestyle Continue to manage taxes throughout retirement 43

44 What is Savvy Social Security Planning? 44

45 Savvy Social Security Planning is Teaching baby boomers through seminars, workshops, and individual consultations Baby boomers want to know... Will Social Security be there for me? How much can I expect to receive? When should I apply for Social Security? How can I maximize my benefits? Will Social Security be enough to live on in retirement? 45

46 Savvy Social Security Planning is Helping baby boomers avoid common mistakes Applying too early Not understanding the interplay of earned, spousal, and survivor benefits Failing to understand the long-term impact of decisions made today 46

47 Savvy Social Security Planning is Guiding clients decisions through in-depth scenario planning Shows year-by-year income and cumulative benefits using clients actual ages and benefit amounts Enables clients to make their own decisions; you provide guidance, but the ultimate decision is theirs Shows income shortfalls that will need to be made up from other sources, leading to comprehensive retirement income planning 47

48 Establishing yourself as an expert on Social Security Learn the rules and stay on top of the literature and new developments Identify a niche: Boomers approaching age 62 Women Married couples Communicate and educate: seminars, workshops, newsletters Develop a referral strategy 48

49 Opportunities abound for advisors knowledgeable about Social Security Baby boomers are turning 62 at the rate of 10,000 per day Social Security is more complicated than people realize Decisions made early in the process have farreaching impact The strain on Social Security personnel will increase Advisors who understand Social Security will be in great demand 49

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